What are Trade Payables in Accounting? Definition, Examples and Management

Trade Payables Definition

Trade payables, often called to as accounts payable, represent the amount a business owes its suppliers for goods or services they have bought on credit.

 

When a business buys goods or services on credit, they will receive payment terms from the supplier which is the maximum time given to make the payment in full.

 

For example, ‘net 30’ payment terms would mean the business has 30 days to make the payment.

 

Trade payables are classed as current liabilities, as they are usually payable within one year.

What are trade Payables in Accounting

Trade Payables Examples

Trade payables cover a wide range of transactions where a business owes money to its suppliers for goods or services received on credit.

 

Here are some common examples:

 

  • Raw Materials: A manufacturing company buys raw materials on credit from a supplier to use in the production process.

 

  • Inventory Purchases: A retail store purchases inventory items on credit to restock their shelves.

 

  • Office Supplies: A company buys office supplies on credit for its day-to-day operations.

 

  • Utility Bills: A business receives utility services on credit and pays for them at a later date.

 

  • Services Received on Credit: A company outsources cleaning services and is billed on credit terms.

 

  • Rent Payments: A business rents their office pays the lease amount on credit.

 

  • Transportation Costs: A company uses a courier service for shipping goods and pays on credit.

 

  • Maintenance and Repairs: A businesses has their leaky roof repaired, and pays on credit.

 

  • Subcontractor Services: A business outsources the build of a new IT system to a subcontractor and pays them on credit terms.

Importance of Trade Payables

Trade payables are extremely important to a business for several reasons:

Working Capital Management

Good management of trade payables allows a business to optimise cash flow by delaying payments until they fall due, and even extend the payment terms if possible.

 

If a business did not use trade payables, they would need cash on hand every time it made a purchase from their suppliers.

Cash Flow Impact

Good management of trade payables allows a business to optimise cash flow by delaying payments until they fall due.

 

By delaying payments without compromising supplier relationships or incurring late fees, a business can maintain more cash on hand to be potentially used for investing in growth opportunities or covering unexpected expenses.

Supplier Relationships

Maintaining healthy relationships with suppliers is vital for business sustainability.

 

Managing trade payables responsibly creates trust and goodwill with suppliers, often leading to favourable credit terms and even favourable discounts and bulk deals.

Accounting for Trade Payables

There are two simple steps associated with accounting for trade payables as below:

Step 1 – Goods/Services Bought on Credit

When a business purchases goods or services on credit, it will initially recognise a liability in the form of a trade payable.

 

This acknowledgment is usually done when the invoice is received.

 

The accounting entry for trade payables involves crediting the accounts payable account and debiting the relevant expense or asset account, depending on the nature of the transaction.

 

For example, let’s assume a business has made a new stationary order on credit:

Accounts Payable

Credit

Stationary Expense

Debit

The Accounts Payable account is credited, to increase the liability, and the Stationary Expense account is debited, to increase the expense.

Step 2 – Payment

When the company makes the payment, the accounts payable is debited to reduce the liability (as it has been paid off), and the cash or bank account is credited to reduce the asset of cash held.

Accounts Payable

Debit

Cash/Bank Account

Credit

Managing Trade Payables

Some best practices for managing trade payables would include:

Timely Record Keeping

Ensure that all invoices and transactions are promptly recorded to maintain accurate and up-to-date trade payable balances.

Negotiate Favourable Terms

Negotiate mutually beneficial payment terms with suppliers to align with the businesses cash flow cycles and optimise working capital.

Leverage Early Payment Discounts

Evaluate opportunities to take advantage of early payment discounts offered by suppliers, balancing the benefit against the impact on cash flow.

Regular Reconciliation

Regularly reconcile accounts payable balances with supplier statements to identify discrepancies and address them promptly.

Communication

Maintain open communication with suppliers to address any issues, negotiate terms, or discuss alternative payment arrangements if needed.